1. The airline industry in the Community is faced with a critical challenge: the need for it to compete with third-country airlines which benefit from generous subsidies, while the Community industry is subject to strict rules on government aid. i

2. The recent crisis in some parts of the industry has led third-country governments to subsidise their airlines in a manner which is likely to distort competition. i Community airlines have provided information about the pressure which these airlines exert on ticket prices and to which they are unable to respond.

3. Additionally, subsidisation is not the only type of state-involvement which can result in distortion of international supply of airline services. Pricing practices by foreign air carriers may be at unfair levels by virtue of them being state-controlled rather than being openly subsidised. In fact, any subsidies granted by foreign governments to carriers they themselves control would be extremely difficult to detect.

4. Some third countries have introduced instruments to deal with such situations. i Also the Community has, for the maritime sector, provided for redress in case of unfair pricing practices. i However, for the airline sector, no such possibility exists at the Community level. The only currently available means are bilateral agreements which often lack, both in terms of coverage and remedies, the potential to provide swift and comprehensive protection against subsidisation and unfair pricing practices. i Indeed, even if one of the Member States had been able to take any action under its bilateral agreements, this would have just widened the gulf even further between the ways in which different Community airlines are treated.

THE NEED FOR ACTION

5. The proposed instrument is designed to address this problem. It will allow Community action against unfair competition from non-Community carriers on routes to and from the Community due to trade-distorting third country subsidies. Additionally, it will provide for a remedy against unfair pricing practices by state-controlled air carriers. Cases will be examined on the basis of industry complaints which show that such subsidies or unfair pricing practices are causing injury on certain routes. The investigation and decision-making processes are based predominantly on existing practices in the area of trade in goods i but allow sufficient flexibility to deal with the specific problems of the airline sector, and take into account the procedures set out in Council Decision 1999/468/EC.

6. This instrument is designed to restore the 'equality of arms' with some of our competitors in providing protection against unfair pricing practices in air transport. However, it will not replace airline agreements with third countries that can be used to deal effectively with distortion issues. In cases where a legal instrument exists which would enable a satisfactory response to be made, that instrument will therefore take precedence over this Regulation, which will be subsidiary to it.

SUMMARY OF THE PROPOSAL

7. Principle: The proposed instrument allows action against subsidised or certain unfairly priced and injurious air services supplied by non-Community carriers on certain routes to and from the Community. It contains simple and workable rules of substance and procedure but, at the same time, does not require the EC to go below the tested standards applied in the goods area.

8. Practices covered: The proposal uses the subsidy definition of the WTO Agreement on Subsidies and Countervailing Measures. Trade distorting subsidies granted by foreign governments, i.e. subsidies targeted at certain enterprises or sectors and export subsidies are actionable (generally available subsidies e.g. to all service providers including airlines are considered not to be trade distorting). Additionally, it takes over in large part the definition of 'unfair pricing practices', i.e. the charging at fares at levels below those charged by a established and representative carriers (or, if this information is not available, below the constructed rate, i.e. costs plus profit of other comparable carriers), but limits it to such practices conducted by state-controlled air carriers.

9. Investigation: The proposal provides for all features of a trade in goods type investigation but in a simplified and less binding manner. An investigation would be defined by two parameters:

- Subsidies given by a certain government to eligible foreign carriers or unfair practices by certain state-controlled foreign carriers

- certain routes were our industry faces problems.

The draft introduces a definition of 'like air service' which is, however, less restrictive as in trade in goods. The EC carriers would have to fly on the same or almost the same routes as the foreign carriers but there are not restrictions concerning the type of service supplied. The investigation covers at least 'a major proportion' of EC supplied services.

10. Initiation threshold: The Community industry has a right to initiation if the duly substantiated complaint is made on made on behalf of Community industry. Additionally, the Commission can open ex officio if there is sufficient evidence.

11 Due process: Public notice is given at initiation, foreign carriers and other interested parties have the right to be heard, measures are published in the OJ. Rules on non-co-operation are necessary to be able to draw adverse inferences.

12. Procedure: Member States will be consulted at every stage of the proceeding in a Committee under the advisory procedure, in line with Council Decision 1999/468/EC of 28 June 1999. i The droit de regard of the European Parliament is also ensured in accordance with Article 8 of that decision.

13. Measures: Measures (duties, undertakings or other appropriate measures e.g. restriction of landing rights) will be imposed on a per-carrier basis. The level of the measure is capped at the amount of subsidy in terms of benefit to the recipient (or the difference between the actual fare charged by a state-controlled foreign air carrier and the 'normal fare') or a level which is sufficient to remove the injury, whatever is the lower. Provisional measures have a duration of 6 months. Measures may be reviewed if warranted. Similar as in the goods area, there is no provision on how duties are levied. In practice, the Member State authorities collecting an 'airport tax' could also collect the duty. Duties collected will be remitted to the Community budget in line with existing provisions applied within the European Union on redressive and countervailing duties.